Fed Watch: Policy Adrift

Policy Adrift, by Tim Duy: I understand the Federal Reserve Chairman Ben Bernanke is considered something of a sacred cow, our one point of light in an uncertain world. An academic who cannot be questioned by other academics. A smart person who has mastered the Great Depression and therefore “knows” what to do, and is providing the leadership to do it.

I am beginning to question all of these assumptions.

I am hoping Bernanke can step forward and clarify the direction of policy. At this moment, he has the best perch from which to guide policy between administrations. He has the opportunity to show leadership. But for now, I see a distinct lack of leadership from the Federal Reserve, and it suggests that Bernanke has used up his bag of tricks. And I don’t think that he knows what to do next. Indeed, Fedspeak is now littered with confusing statements that leave the true policy of the Federal Reserve in question.

First, policymakers appear uncertain about what to do with the Fed Funds target. The minutes of the most recent meeting tell the story:

Prof Duy, You know it doesn’t take an economics degree to have seen that Bernanke has been vocalizing at the line of scrimmage for a long time. I think you are right that Paulson wanted to throw money at Wall Street after the miscalculation as to the aftershocks of letting Lehman go down. Your cry for clarity and accountability, to say nothing of policy deliberation, will not in itself produce more coherent and applicable solutions to the current crisis. Economics as a profession seems to lack new approaches in this moment or a new analysis. Where is the Keynes of our time?